ELLIOTT WAVE ANALYSIS - Latest Market Commentary
Last week, we witnessed global stock market’s most volatile price action of the entire year! In the U.S., the VIX (the so called ‘fear gauge’) jumped 230% above its 200 day moving average, which is second highest on record and only behind the catastrophic 1987 crash. In Europe, Germany’s Dax index underwent its biggest one-day drop in history (by points) only to be recouped within the next several trading hours. In China, futures trading was halted to counter the bearish attitude that had already been looming since the June highs but had taken on a much more aggressive mode during the last week. Is it a coincidence that amidst such panic a report promptly flashed up on Monday stating that stock market timers with the best track records are treating the market’s ‘carnage’ as a buying opportunity? Still, the reaction of these market pros might be a bit too rash – although we have identified the current sell-off as part of a downswing that will precede a finalising advance into higher highs to verify our ‘inflation-pop’ idea, the current downswing will ###require some time to unfold. Under Elliott Wave Theory, counter-trend moves have to satisfy a combination of price and time requirements – a sell-off might be short in time but it should be deep in amplitude; a shallow decline should otherwise consume a considerable amount of time. Translated to the example of the S&P, the decline from the all-time high of 2134.72 was sharp but not deep – a fib. 38.2% retracement of the preceding 3rd wave upswing measures to the 1690.00+/- area which is the idealised target we focus on during the next months. The equivalent levels for the Dow Jones (DJIA) even extend to the fib. 50% retracement at the 14350.00+/- area whilst in Europe, the Eurostoxx 50 is seen with potential to min. 2600.00+/- and the Dax is expected to exceed its Oct.’14 low. In Asia, the Shanghai collapsed below its July low of 3373.54 and although the current strong rally during the latter half of the week might suggest a V-shaped bottom has occurred, the wave structure forewarns of a continuation lower. The same applies to the Nikkei 225 that is likely to trade below its 17714.30 low only to begin a more prolonged rally afterwards. Even the ASX 200 has taken big losses – its accelerative decline has verified the completion of a multi-year zig zag sequence from the 2009 low to this year’s high of 5996. But be aware that this zig zag is part of a double pattern that will continue higher from early-2016 onwards!
During the latter half of last week, the US$ index traded into the lower band of the forecast short-term resistance at 95.92+/-. The character of this rally however suggests that it is unfolding into an impulsive pattern – but how does this fit into the larger picture as we already confirmed the beginning of a new downtrend from the March high of 100.39? The most likely solution that is corroborated by fib-price-ratio measurements is that a running flat is underway unfolding as a 2nd wave counter-trend correction to the preceding April-May sell-off from 99.99 to 93.13. Although this allows for a brief spike higher, a reversal should be ###close at hand and the US$ index soon resume the larger downward tendency. The Euro’s price action can be interpreted in the same manner, and here we find an even more convincing fib-price-ratio as the ‘b’ wave of the running flat (in progress from the May high of 1.1468) almost pinpointed a fib. 38.2% extension of the ‘a’ wave. Strong support is expected towards 1.1097+/- to halt the current sell-off and initiate an upside reversal that would validate an acceleration higher in the weeks ahead. Sterling reacted at pre-determined short-term resistance at 1.5810 with a traded high of 1.5818 and has since sold off. Now it is approaching interim support towards 1.5325+/- to complete wave ‘a’ of the single zig zag decline in progress from 1.5818. It is important to emphasise that this single zig zag is the final part of a multi-month double-three sequence that (in this case) consists of a running flat followed by an ‘x’ wave and a single zig zag. As we expect Sterling to stretch lower during the next several trading sessions whilst the US$ index is on the verge of downside acceleration, we are aware of this short-term divergence – but this could resolve in a matter of days. US$/Yen staged a deep 4th wave rally during the last trading days and as it has already achieved a fib. 61.8% retracement, the probability points lower from current levels.
Bonds (Interest Rates)
With the Federal Reserve maintaining its reserved stance on the possibility of raising interest rates in September (although Vice Chairman Stanley Fischer admitted that the likelihood for such a move was ‘pretty strong’ until China’s decision to devaluate the yuan), speculations abound on reasons for and against the first hike since the end of the Great Recession. Even readings of the most recent statements of the FED committee’s members are far from a unanimous interpretation. The more important will be ###Fischer’s speech on Saturday at Jackson Hole (Janet Yellen will not be present) – it could be a catalyst for short-term movements and help to gauge the conformity to the larger picture. From an Elliott Wave perspective however, the situation appears quite robust. Since forming a low at 1.903 this month, US10yr yields formed a V-shaped bottom and are poised for upside acceleration. This is because the August low has completed a multi-week double zig zag counter-trend decline that is labelled as a 2nd wave – 3rd wave acceleration is mandatory. This outlook is corroborated when we compare the T-Note futures that have confirmed the completion of a double zig zag upswing at the 129/28 high. In Germany, the DE10yr yield also successfully completed a 2nd wave counter-trend correction at 0.509% - an upside extension is due that would corroborate the 0.043% level reached in April as the historical low.
Gold and silver prices were trading higher on Friday supported on some safe-haven buying amid weaker global stock markets before the weekend takes place. This week's financial market volatile action has led many economists to believe that the U.S. Federal Reserve will not be ready to raise interest rates in September and maybe even not at its December FOMC meeting, either. But a confusion comes from ###this week's better US economic figures (GDP +3.7% in IIQ, good jobs report), so high volatility remains the most likely scenario for the next few weeks. Gold and silver are expected to benefit from the possible turmoil in the nearest future - gold has already completed its long-term bear market and should lead precious metals to the upside whilst silver remains just a few percent away from its ideal downside targets. Meanwhile, Crude Oil was the biggest surprise to many market participants. The so advertised weak demand from China didn't take effect this week and Oil staged an impressive +20% recovery rally. It is enough to assume that the entire 4-year bear market has just completed into the recent low of 37.75!